In April 2017, the Canadian government announced its intention to
legalize recreational cannabis. Sales may begin as early as the middle
of 2018 - a moving target.

The Canadian Recreational Cannabis Market is modelled over a four-year
time horizon, focusing on cross-price elasticity of demand of individual
consumer cohorts. Second order model drivers include Canadian population
dynamics, producer efficiency gains, and spillover effects of
recreational legalization.

In summary, this research finds:

Canadians will consume 473.7 metric tons of recreational cannabis in
FY2018; consumption will increase to 860.8 metric tons by FY2022.

At the inception of legalization pretax prices will average $8.33 CAD
per gram, falling 28.3% to $5.97 CAD by FY2022. As in any
black-to-white market, legal producers must underprice illegal ones to
maintain a sustainable market, and thus, Canadian Licensed Producers
should seek to price competitively and pass on associated costs and
other efficiency gains to end consumers.

Throughout the modeling period, heavy and regular users drive the
lion's share of demand (see graph above), 95% in FY2018 to 94.5% in
FY2022.

Total revenues will increase over time, with higher sales volume
offsetting downward pricing pressure. We project revenues of $5.0
billion CAD in FY2018, increasing to $7.0 billion CAD in FY2022.

Importantly, increasing revenues should not be conflated with overall
market growth; it is instead a function of existing consumers moving
from the black to the white market. Contrary to the consensus view, we
predict that total market demand will contract by an average of 0.98%
annually over the four year period in the absence of population growth.

With expectations for overall market growth tempered, investors may
wish to focus on Licensed Producers that emphasize cost efficiency.